China XD Plastics Company Limited
Q1 2020 Earnings Call Transcript

Published: 29 Jun 2020

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the China XD Plastics First Quarter 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to China XD Plastics Company Limited, Investor Relations, Shaojie Wen. Thank you. Please go ahead, sir.

[Shaojie Wen:]

Thank you. Hello, everyone. Thank you all for joining for the call China XD Plastics First Quarter 2020 Financial Results Conference Call. Joining me on the call today are Mr. Jie Han, Chairman and CEO; Mr. Qingwei Ma, Chief Operating Officer and Chief Technology Officer; Mr. Taylor Zhang, Chief Financial Officer. Earlier today, China XD Plastics issued a press release announcing the first quarter 2020 results. Before management's presentation, I would like to refer to the safe harbor statements in connection with today's conference call and remind our listeners that management's prepared remarks during the call may contain forward-looking statements, which are subject to risks and uncertainties, and that management may make additional forward-looking statements in response to your questions. All statements other than statements of historical fact contain our forward-looking statements, including, but not limited to the company's growth potential in international market, the effectiveness and profitability of the company's product diversification, the impact of the company's product mix shift to a more advanced product and related pricing policy, the volatility of the company's operating results and financial condition, the company's projection of performance in 2020 and other risks detailed in the company's filings with the SEC and available on its website at www.sec.gov. These forward-looking statements involve known and unknown risks and uncertainties and are based on current expectation, assumption, estimate and projection about the company and the industry. The company, therefore, claims the protection of the safe harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today, and we refer you to a more detailed discussion for the risks and uncertainties in the company's filings with the SEC. To supplement the financial results present in accordance with the US GAAP, management will make reference to earnings before interest expense, income tax, depreciation and amortization, which we refer to as EBITDA. EBITDA is a non-GAAP financial measure reconciled from net income, which the company believes to provide meaningful additional information to better understand its operating performance. A table reconciling net income to EBITDA can be found on the earnings press release issued earlier today. I would now like to turn the call over to our Chairman and Chief Executive Officer, Mr. Han. Mr. Han will be speaking in Chinese, and I will translate his opening remarks into English. Mr. Han, please go ahead. [Foreign Language]

[Jie Han:]

[Foreign Language] Due to the COVID-19 pandemic, China's auto industry was hit hard with production and sales decreased by 45.2% and 42.4%, respectively for the first quarter of 2020. The Company's manufacturing facilities in Harbin and Sichuan were temporarily shut down in February and March 2020, while our Dubai facilities' operation has been suspended since early February 2020, pursuant to the local government directives. During the first quarter of 2020, the Company's revenue decreased by 52%, and our domestic sales decreased by 51.1% in all regions, as compared to the same period of the last year. The Company has taken proactive measures to respond to these changes from the supply disruption and the decreased orders of auto industry. We continued to promote sales of high-priced semi-finished goods in domestic market during the first quarter of 2020. We are pleased to see an overall increase of 65.6% in the average RMB selling price of our products, to partially offset the decreased sales volume of 70%. [Foreign Language] Meanwhile, China XD has responded to the COVID-19 pandemic by producing raw materials for PPE such as goggles and masks, to help alleviate the pandemic to our communities and mitigate the negative impact of world pandemic on Chinese auto industry. [Foreign Language] We also resumed our commitment to completing our industrial project for upgrading existing equipment for 100,000 metric tons of engineering plastics by the end of third quarter of this year, and our Qinling Road Project and Jiangnan Road Project for equipment upgrade and factory revamping by the end of the fourth quarter of 2020, thus bringing the production capacity in Heilongjiang Campus back to 390,000 metric tons. At the same time, we expect to complete additional 10 production lines in our Sichuan plant by the end of the fourth quarter of this year, thus to bring the total capacity of Sichuan base to 300,000 metric tons. Together with the production capacity ramp up in Dubai, we are confident in our ability to make further inroads into more specialized high-end products for various applications in more other markets. [Foreign Language] We will continue to optimize our management structure and enhance our operating efficiency. We are confident, through our cooperation with Chinese big banks to successfully execute our expansion strategy in multiple regions and sectors, and to be confident with our core market positioning and expanded platform for growth. [Foreign Language] With that, I would now turn the call over to Taylor Zhang, our CFO to walk you through our financials. Taylor?

[Taylor Zhang:]

Thank you, Mr. Han. Thank you, Shaojie and thank you everyone for joining the call today. Before I review the numbers, let me remind you that all figures I discuss are for the reporting period, the first quarter of 2020 unless I state otherwise. Additionally, any year-over-year comparison is to the first quarter of 2019 and any sequential comparison is to the fourth quarter of 2019. So, let's go over our first quarter results. Revenues were $144.8 million in the first quarter, a decrease of $156.7 million, or 52%, compared to $301.5 million in the period of last year. This was due to the decrease of 70% in sales volume, 5.5% negative impact from exchange rate due to depreciation of RMB against US dollars, partially offset by an increase of 65.6% in the average RMB selling price of our products, as compared to those of the same period of last year. In domestic market for the three months ended March 31, 2020, revenue from domestic market decreased by $151.1 million or 51.1% as a combined result of a decrease of 69.8% in sales volume, a depreciation of RMB against US dollar by 5.5%; and partially offset by an increase of 67.4% in the average RMB selling price of our products, as compared with those of prior year. According to China Association of Automobile Manufacturers, automobile production and sales in China decreased by 45.2% and 42.4%, respectively, for the first quarter of 2020 as compared to the same period last year. Due to the severe impact of COVID-19 pandemic, the macroeconomic conditions were exacerbated sharply resulting in ceased auto production and slack consumer market. The Company has temporarily closed its manufacturing facilities corporate offices in accordance with the requirements of the PRC government beginning in early February, with limited support from the Company's employees, delayed access to raw material supplies and inability to deliver products to customers on a timely fashion, the Company's business was negatively impacted and has generated lower revenue during the period from February to April 2020. Our domestic sales during the first quarter of 2020 severely decreased by 51.1% in all regions, as compared to the same period of last year, including the decrease of sales by 58.6% in Northeast China, 26.1% in North China, 43.7% in East China, 74.9% in South China, 74.5% in Central China, and 64.7% in Southwest China in this quarter compared to the same period of last year. As for the RMB selling price, the increase [ph] of 67.4% was mainly due to the sales of high-priced semi-finished goods in domestic market during the three months ended March 31, 2020. In overseas market for the three months ended March 31, 2020, revenues was $0.2 million as compared to $5.8 million of that in 2019. The Dubai facility was temporarily shut down since late February and has not resumed its operation till the current period, which was – which has negatively impacted operations in Dubai facility. Gross profit was $5.2 million in the quarter ended March 31, 2020, compared to $50.3 million in the same period of 2019, representing a decrease of 89.7% or $45.1 million. Our gross margin decreased sharply to 3.6% during the quarter ended March 31, 2020 from 16.7% during the same quarter of 2019 primarily due to the decreased sales of finished goods as a result of COVID-19 pandemic, and increased cost for idle capacity as a result of shutdown. G&A expenses were $6 million in the quarter ended March 31, 2020 compared to $8.8 million in the same period of 2019, representing a decrease of 31.8%, or $2.8 million. The decrease was primarily due to the decrease of $2.9 million in salary and welfare as a result of management's cost reduction measure to cope with impact form the COVID-19 pandemic. R&D expenses were $3.8 million in the quarter ended March 31, 2020 compared with $10.1 million in the same period of 2019, representing a decrease of $6.3 million, or 62.4%. This decrease was due to a decrease of $5.9 million in raw materials consumptions by R&D, a decrease of $0.1 million in salary and welfare for R&D personnel, and a decrease of $0.3 million in depreciation. As of March 31, 2020, the number of ongoing research and development projects was 325. Total operating loss was $4.7 million in the first quarter ended March 31, 2020 compared to operating income of $31.2 million in the same period of 2019, representing a decrease of 115.1% or $35.9 million. This decrease [ph] is primarily due to the lower gross margin, and partially offset by the lower operating expenses. The effective income tax rates for the three-month periods ended March 31, 2020 and 2019 was negative 8.8% and 24.9%, respectively. The effective income tax rate decreased significantly from 24.9% in last year to negative 8.8% for this quarter, primarily due to the operating loss incurred as a result of the COVID-19 pandemic. Net loss was $11 million for the first quarter of this year compared to a net income of $11 million in the same period last year, representing a decrease of $22 million, or 200%. Basic and diluted losses per share for the first quarter of 2020 were both $0.16, compared to $0.16 earnings per share per share for the same period of 2019. The average number of shares used in this computation of basic and diluted losses per share for the three months ended March 31, 2020 was 66.9 million, compared to 50.9 million shares for earnings per share in the period last year. EBITDA was $21.7 million for the first quarter of 2020, compared of $47.6 million for the same period of last year, representing a decrease of $25.9 million, or 54.4%. For a detailed reconciliation of EBITDA, a non-GAAP measure, to its nearest GAAP equivalent, please see the financial tables at the end of our press release issued early today. Now let’s turn to the balance sheet. As of March 31, 2020, the Company had $190.4 million in the total amount of cash and cash equivalents and restricted cash, a decrease of $38 million or 16.6% as compared to $228.4 million as of December 31, 2019, mainly due to the operating cash outflows. As of March 31, 2020, working capital was $34.1 million and current ratio was 1, as compared to the current ratio of 1 as of December 31, 2019. Stockholders' equity as of March 31, 2020 was $812.8 million, decreased by 2.8% as compared to $836.4 million of December 31, 2019 mainly due to the net loss incurred during the three-month period ended March 31, 2020 due to the negative impact of COVID-19 pandemic. Now moving to our financial guidance outlook for 2020. As a result of the outbreak of COVID-19 in the PRC, China Auto Industry production and sales drastically decreased by 33.4% and 31.14% for the first month of 2020, according to China Association of Automobile Manufacturers. It has a ripple effect and impact throughout China auto supply chain, including our Company. Due to the fact that the Company had temporarily closed some of its manufacturing facilities and offices in PRC. The ongoing COVID-19 pandemic has a material adverse effect on our business operations. In light of these circumstances and continuing uncertainties, the Company will not be able to forecast its financial guidance for fiscal 2020 until further notice. Before we open the call to your questions, I would like to note that for any questions directed to management of China, I will translate both their questions and their answers. And if you want to ask a question in Chinese, please also ask it in English for the benefit of our other listeners. Please also note that we'll only be able to respond to questions about financials and operating results. For other matters, including the going-private offer, we refer you to our already issued press releases. We'll not be able to respond to questions that are directed to the principals of the going-private offer about the proposed transaction. With that, we will now open the call to your question. Operator?

[Operator:]

[Operator Instructions] Your first question comes from [indiscernible] from Dosadi Capital [ph]. Please ask your question.

[Unidentified Analyst:]

Hello. My question is about the federal tax line that was filed against you. I think it's $63 million. Do you plan to pay it before December?

[Taylor Zhang:]

Hey. Hi, thank you for the question. For the federal tax liability we have - we're being in communication with the test agent and that is currently under review and we believe we will reach a mutually a great solution. It's our effort to meet such case [ph] obligation as soon as possible. As for timing, because discussion is still ongoing, we are still uncertain at this point.

[Unidentified Analyst:]

Thank you.

[Operator:]

[Operator Instructions] There is currently no questions at this time. I will now pass the line [ph] to Shaojie for closing remarks.

[Shaojie Wen:]

On behalf of China XD Plastics, we want to thank you for your interest and participation in this call. If you would like to speak with us further, please call either myself or Taylor in China XD New York office. The contact numbers for all of us are listed at the end of the press release. Thank you.

[Operator:]

Ladies and gentlemen, this does conclude today's conference call. Thank you for participating. You may now disconnect your lines.